Impossible things to do before Brexit

June 12, 2016

Guy Dobson: Dynamique director

Dynamique’s Guy Dobson reports from London as investors everywhere wait for a very important date…

The opening lines to Lewis Carroll’s ‘Alice through the looking glass’ are unequivocal about who to blame: “One thing was certain, that the white kitten had nothing to do with it — it was the black kitten’s fault entirely.”

But for Britons poised to vote later this month on an historic exit from the European Union (an event known by the mashed-up word ‘Brexit’) the answer is far from black-and-white.

In fact, according to the latest polls, Brexit remains a black-or-white issue in the UK – either cat has an even chance of winning the June 23 vote.

With Brexit at even odds investors are naturally anxious about the consequences of this singular break from business-as-usual. If the UK jumps through the mirror into the strange Alician world beyond will reality crack for the rest of us?

The simple answer, of course, is ‘we don’t know what we don’t know’ as no country has ever seceded from the European Union before.

For now investors do not know exactly what to do about Brexit – hedging a 50/50 bet is never easy – but some specific concerns have begun to emerge.

Some funds, particularly in the commercial property sector, have been focused on maintaining liquidity in the expectation that investors may start making massive withdrawals if the vote goes to the YES campaign.

The Bank of England is so concerned that it is holding talks with fund managers about how they would handle a potential run on property funds if UK votes to leave the EU.

‘They have been called in for cucumber sandwiches and spoken to,’ senior executives in the property industry have put it. The real risk is to open-ended property funds that allow investors to commit and withdraw funds at short notice – a facility that can conflict with longer process of buying and selling commercial buildings.

So what of other risks impacting international investors from Brexit? According to the US Federal Reserve, a vote by UK voters to leave the EU could deliver a “significant adverse reaction” to global markets and impact the US economic recovery.

While scenarios are being batted about by both sides in the debate, at the street-level Brexit is really about loss of democratic rights over the nation’s destiny under the EU rather than economics.

Rights once taken away are rarely restored, while economic fallout causes short-term turbulence but invariably reverts back to the equilibrium.

Should Britain leave the EU the Germans will not stop selling BMWs, Mercedes and Volkswagens to the UK market that has always been, and always will be, a lucrative market for their products. The same is true for French wines and Spanish holidays.

So how have New Zealand fund managers positioned their hedges and risk exposures in the run up to the Brexit vote? And what ‘special event’ communication should be sent out to their investors?

From a regulatory standpoint it is no doubt that advisers and managers should have fully considered the likely impact on client portfolios of a ‘UK OUT’ vote – including suitable guidance and advice for clients in the event of extreme market turmoil.

A pro-Brexit vote will be far more damaging to the European bureaucracy and other EU countries than to the UK. Without the UK’s NZ$16 billion annual subscription, the EU budget will be extremely stretched, impacting subsidies and support grants given to the ‘non net donor’ countries.

But, as in the topsy-turvy literary universe designed by Lewis Carroll, anything could happen if Britain divorces the EU.

Will a Brexit be worse than the GFC?

Time, perhaps, to sit down with a cup of tea and look for inspiration in ‘Alice through the looking glass’:

“Twas brillig, and the slithy toves

Did gyre and gimble in the wabe;

All mimsy were the borogoves,

And the mome raths outgrabe.

`It seems very pretty,’ she said when she had finished it, `but it’s rather hard to understand!’ (You see she didn’t like to confess, ever to herself, that she couldn’t make it out at all.) `Somehow it seems to fill my head with ideas – only I don’t exactly know what they are! However, somebody killed something: that’s clear, at any rate.”

Dynamique offers financial industry performance risk solutions and retail investor CPD programs with offices in NZ and the UK. Guy Dobson, Dynamique director, is currently in the UK.